GST compensation: 20 states to borrow Rs 68,825 crore via open market borrowings

The Centre on Tuesday gave the nod for 20 states to raise a total of Rs 68,825 crore among them via open market borrowings to bridge part of their goods and services tax (GST) shortfall in FY21.

The move will ratchet up the supply of state government bonds at a time when there has already been a sustained increase in the cost of market borrowings across the states. However, the Centre will likely facilitate a mechanism in coordination with RBI to avoid a spiralling of the borrowing costs of these states under this special window.

The Centre’s move comes a day after the GST Council failed to arrive at a consensus on how to make good the shortfall in states’ GST revenue from the protected levels. Ten states have refused to accept either of the two borrowing options for states mooted by the Centre, and insisted that the Centre should borrow and transfer them the full compensation amount for FY21 in the year itself.

The Centre’s decision reflects its resolve to go ahead with its plan, but it also shows a straining of the Centre-state ties and new power equations emerging at the Council, which has until recently functioned with minimal discord.

Justifying the decision, a top government functionary said no state has breached even the original 3% (of GSDP) borrowing target so far this fiscal. The limit was raised to 5% from 3% in the wake of the pandemic, subject to certain riders.

The Centre, in contrast, borrowed as much as `7.66 lakh crore, or close to 4% of the country’s GDP, from the market in H1. So the states have much leeway to borrow, the source said, indicating the Opposition’s allegations that the Centre is pushing the states into a debt trap are unfounded.

Under the borrowing Option 1, the Centre had put the upper limit of combined borrowing by all states at Rs 1.1 lakh crore. The amount is related entirely to losses due to implementation of GST while it is estimated that total shortfall, which includes impact due to pandemic, would be Rs 2.35 lakh crore for the current fiscal.

“Additional borrowing permission has been granted @0.50 % of the Gross State Domestic Product (GSDP) to those States who have opted for Option- 1 out of the two options suggested by the Ministry of Finance to meet the shortfall arising out of GST implementation,” the expenditure department said in a statement.

Further, these states would be allowed to utilise the 0.5% of final additional borrowing space allowed earlier without any condition. “Action on the special borrowing window is being taken separately,” the government said.

The states don’t have to bear the interest or principal repayment costs; the repayments would be fully adjusted against future collections of the cess, which has been extended beyond June 2022, till such time necessary for servicing the debt fully.

Already, the gross State Development Loan issuance expanded by a substantial 56.8% to Rs 3.53 lakh crore in H1FY21 from Rs 2.25 lakh crore in H1FY20. The net SDL issuance rose by an even higher 91.4% on year in H1FY21 to Rs 3.02 lakh crore.

The weighted average yield of state government dated securities (across states and tenures) auctioned October 6 was at 6.80%, 23 bps higher than week ago and 31 bps higher than that in the first week of September.

The states to use the borrowing facility for GST are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh and Uttarakhand.

The Centre, in view of the Covid-19 pandemic, had in May allowed an additional net borrowing of up to Rs 4.28 lakh crore (2% of GSDP) to states for FY21. While 0.5 pecentage point (pp) of the extra borrowing window (Rs 1.07 lakh crore) is available to all states unconditionally, one pps was to be made available in four equal tranches with each to “clearly specified, measurable and feasible reform actions”. The balance 0.5 pp was to be accessed by states, subject to their ‘completely achieving’ the milestones in at least three out of four reform areas. This last condition has now been waived for the states using the Option 1 of special GST window.